Discussion Paper Details

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Title: The Real Exchange Rate Always Floats

Author(s): Thorvaldur Gylfason

Publication Date: May 2002

Keyword(s): flexible exchange rates

Programme Area(s): International Macroeconomics

Abstract: This Paper makes two main points. First, irrespective of nominal exchange rate arrangements, the real exchange rate always floats ? if not through nominal exchange rate adjustment, then through price change. Further, because prices and wages tend to be sticky, the adjustment of real exchange rates towards long-run equilibrium takes time, as witnessed by long-lasting currency misalignments around the world. Second, real exchange rates are likely to fluctuate on their way towards long-run equilibrium because of the dynamic interaction between real exchange rates and the current account; or, put differently, because the structure of lags with which exchange rates impact the volume of exports and imports may give rise to oscillatory behaviour.

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Bibliographic Reference

Gylfason, T. 2002. 'The Real Exchange Rate Always Floats'. London, Centre for Economic Policy Research.